The residential housing market has had rising prices for the past two years. Only recently have those increases slowed. For months, home prices in most large markets rose 20% year over year. In some markets, the number was closer to 30%. Low mortgage rates fueled the jump, but those are gone. Experts have started to look for troubled markets rather than those that will do extremely well. A new report shows that Essex County, N.J., has the best chance of a large downward correction among all big counties based on population.
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The recent Special Housing Risk Report from the real estate research company ATTOM has a subtitle of “Mid-Atlantic States, California and Illinois More Vulnerable to Housing Market Declines in Third Quarter.” Of course, the third quarter has been over for a month. The measures of affordability included the yardstick of income compared to the home price, foreclosures, underwater mortgages and levels of unemployment. The authors looked at the counties most likely to suffer home price declines.

According to the report, “The 50 most at-risk included eight in and around New York City, seven in the Chicago metropolitan area, four in or near Philadelphia and nine spread through northern, central and southern California.” Indeed, Passaic County, N.J., next to Essex County, was second on the risk list. Nearby Richmond County, N.Y., was fifth.

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One hallmark of most counties with falling home price risk is the relationship between income and home price. In some at-risk counties, people spend over 50% of their income to buy a home, based on median prices. In many, the number is above 40%.

The research does not make it entirely clear why the at-risk counties are in and around big cities. Perhaps it is because city home prices are higher than in the balance of the nation.

One thing is certain. Home prices need to drop more to drive up affordability in many markets. If people want to live near urban centers, they need to take the risk that the homes they buy will collapse in value.

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